Property Investor Sentiment All Over The Place

The latest weekly data from our household surveys includes our regular question on intention to transact. Property Investors are clearly confused. In recent weeks this measure has been gyrating widely, in response to the broader media coverage of the sector and the complex interplay of issues. Last week it was up significantly, this week down.

Behind this movement is uncertainty, as interest rate rises work though, concerns about regulatory intervention reemerge, and yet on the other hand, on some measures home prices are still rising fast and auction clearances remain high.

We now expect this random movement to continue as the shake-down in the investor sector continues. Prepare for a wild ride.

Investors warned to brace for mortgage interest rate rises

From ABC News.

Real estate investors stand to be hardest hit as banks reprice mortgages to meet tougher regulatory requirements, according to a report out today.

JP Morgan’s Australian Mortgage Industry Report surveyed 52,000 households and identified that around 10 per cent of investor loans could be at risk.

The report warns that pressure for banks to increase capital levels on certain types of investor lending by three or four times current requirements could create “extreme effects”.

The most “significant changes afoot” are for investor loans that are “materially dependent on property cash flows” to service the repayments.

As a result, banks with loans dependent on cash flows could be forced to raise rates incrementally to manage the risk, potentially by as much as 3 percentage points in an extreme scenario.

Investors dependent on cash flows from rental income would also be “most sensitive” to interest rate rises of between 2 and 3 percentage points according to the research.

The warning comes as banks such as the Commonwealth and its wholly owned subsidiary BankWest consider further restrictions on investor loans to keep under regulatory requirements for growth capped at 10 per cent per year.

Investors most exposed in NSW

The report’s co-author, Martin North of Digital Finance Analytics, said investors most exposed were in New South Wales which has been the epicentre of steep real estate price growth.

“The highest sensitivity has been in New South Wales where house prices are significantly higher, as are borrowing commitments,” Mr North said.

The report also identifies risk in Western Australia and Queensland because of the mining downturn and Victoria due to an oversupply of inner-city apartments.

It warns that “wealthy seniors” and “young affluent” investors could be the most severely affected, while others such as rural families and low-income households would be least exposed.

JP Morgan banking analyst Scott Manning said it will be important for the Australian Prudential Regulation Authority (APRA) to determine how it defines loans that are “materially dependent” on cash flows flows.

Mr Manning said APRA could “reverse engineer” concerns about investor loan exposure for outcomes that would meet the need for banks to be “unquestionably strong”.

The report found that banks will be positioning themselves to minimise exposure and to meet capital requirements.

It identified the Commonwealth Bank and Westpac as having “the most to lose if heightened churn becomes a reality”, while ANZ was best placed of the big four.

CBA Cuts Investor Loan LVR

Commonwealth Bank of Australia (CBA) has reduced the maximum loan-to-value ratio for investment home loans to 90 per cent, meaning investors should ensure they have a 10 per cent deposit.

This change relates only to investment home loans and is effective immediately. There has been no change for owner-occupier home loans.

The bank has said it expects the change will affect “a very small percentage of the home loan applications” it receives.

Dan Huggins, executive general manager home buying at CBA, added: “We are constantly reviewing our home loan portfolio.

“[This] change will enable us to meet our customers’ needs, while further strengthening our high quality home loan business and ensuring we continue to meet our responsible lending and regulatory obligations.”

Property Investors Show Stronger Buying Intentions

The ABS data today showed that investor lending in January was very strong. Our weekly household surveys ask about buying intentions – a forward looking estimate based on whether they are likely to transact in the next 12  months.

We have an indication earlier in the year from our weekly tracker than perhaps investors were getting cold feet – there was talk of changes to negative gearing, lifting rates and slower home price growth. Last week the buying signals were back to normal, as investors relished in the recent strong home price growth, and Government statements that negative gearing was safe. Despite slow rental income growth it is all about capital gains.

Now here is the latest chart, with the January loan volumes also added and the latest intentions plotted. Investors are still piling into the market – expect strong auction results this weekend. Intentions are stronger than ever!

First Time Buyer Stamp Duty Cut In Victoria As Part Of Housing Strategy

Changes to stamp duty for first time owner occupiers and a vacant property tax have been confirmed by the Victorian Government today.  Separately an equity share scheme was announced to assist first time buyers.

As a package of measures they will certainly impact the market, and whilst the tax breaks and first owner grants may simply lift prices, the tax on vacant properties and equity share strategies could certainly re-balance the market towards owner occupied purchasers. Our research shows there are more than 500,000 households in Victoria are currently struggling to enter the market.

Stamp duty will be abolished for first home buyers for purchases below $600,000, helping thousands of Victorians find their first home, as the Andrews Labor Government tackles housing affordability head on.

Those buying a home valued between $600,000 and $750,000 will also be eligible for a concession, applied on a sliding scale. The exemption and concession will apply to both new and established homes, in a move that is expected to help 25,000 Victorians find their first home.

In a further move to help tilt the scales back towards home owners, the Government will also remove off-the-plan stamp duty concessions on investment properties.

The off-the-plan stamp duty concession will now be available solely for those who intend to live in the property or who are eligible for the first home buyer stamp duty concession.

At the same time, a Vacant Residential Property Tax will address the number of properties being left empty across inner and middle suburbs of Melbourne.

Under the changes, owners who unreasonably leave these properties vacant will instead be encouraged to make them available for either purchase or rent.

The Vacant Residential Property Tax will be levied at 1 per cent, multiplied by the capital improved value of the taxable property. For example, if the property has a capital improved value of $500,000, the amount paid will be $5,000.

There will be a number of exemptions, recognising there are some legitimate reasons for a property being left vacant, including holiday homes, deceased estates and homes owned by Victorians who are temporarily overseas.

Each of these changes are part of the Labor Government’s plan to help more Victorians break into the housing market.

The Equity Share scheme HomesVic was also announced.

Thousands of Victorians, dreaming of buying their first home, will be able to make their dream a reality, thanks to two new changes announced by the Andrews Labor Government.

A new $50 million pilot scheme, HomesVic, will target first home buyers who are able to meet regular mortgage repayments, but because of rising rental costs, haven’t been able to save a big enough deposit.

Under the scheme, to be introduced in January 2018, HomesVic will co-purchase up to 400 homes, taking an equity share of up to 25 per cent in these properties. It will be available for both new and existing homes.

By allowing homebuyers to purchase less than 100 per cent of the property, they will require a smaller deposit and are able to enter the market sooner. In the long term, it will also mean having a smaller loan to service.

Eligible applicants will include couples earning up to $95,000, and singles earning up to $75,000.  Buyers will need to have a 5 per cent deposit. The pilot will be tested across the state, and when the properties are sold, HomesVic will recover its share of the equity.

To further improve buyers’ chances of owning their own home, the Labor Government will also contribute $5 million to a national, community sector, shared equity scheme, Buy Assist.

With similar goals to HomesVic, Buy Assist will help deliver an additional 100 shared equity homes and help low to medium income households get a foothold in the property market.

The Government is also set to give first home buyers priority in government-led urban renewal developments, with at least 10 per cent of all properties allocated to first time buyers.

This approach will be used for the first time at the Arden development.

The plan to develop the 56 hectare site Arden, announced by the Labor Government last year, could be home to around 15,000 people. Under this policy 1,500 of those could be first home buyers.

Finally, in a separate release, the overall portfolio of actions were summarised under “Homes for Victorians”

Every Victorian deserves the safety and security of a home.

But for many, that’s becoming increasingly harder.

A significant number of Victorians, particularly young Victorians, are struggling to break into the housing market.

House prices are rising and upfront costs – a deposit, stamp duty and fees – quickly add up.

It’s getting harder for renters too.

Many struggle to meet high rental prices, or instead choose to live in unsuitable housing. Some don’t have the security they need, or the capacity to personalise their home as they would like.

At the same time, the number of Victorians who need to access public and community housing is growing. Waiting lists are long, and many of our existing homes have fallen into disrepair.

In short, too many Victorians don’t have a real choice about where they live, or the type of home they live in.

And as our population grows, inaction will only make things worse.

Fixing this problem isn’t simple.

It’s why Homes for Victorians provides a co-ordinated approach across government, and across our state. It includes:

  • abolishing stamp duty for first time buyers on homes up to $600,000 and cuts to stamp duty on homes valued up to $750,000
  • doubling the First Home Owner Grant to $20,000 in Regional Victoria to make it easier for people to build and stay in their community
  • creating the opportunity for first home buyers to co-purchase their home with the Victorian Government
  • making long-term leases a reality
  • building and redeveloping more social housing – supporting vulnerable Victorians while creating thousands of extra jobs in the construction industry.

It builds on existing work being done, including the soon to be released Plan Melbourne 2017-2050, reform of the Residential Tenancies Act 1997, the Better Apartment guidelines and the Family Violence Housing Blitz.

It also builds on our efforts to better connect Victorians with services and infrastructure. From schools to health care, roads to public transport, regardless of where they live, every Victorian should have access to the things they need.

It’s a big job, but the aim is simple: to give every Victorian every opportunity to find a home.

This Week The Investor Intention Indicator Is Down Again

We just got the results back from this week’s household surveys, and yes, we went straight to the investor intention to transact series. It is down again, now for the fourth straight week, and continues the trend we reported last week. Whilst “a swallow does not make a summer”, it could be a leading indicator of trouble ahead.

If the data is correct, the current home sales momentum is likely to slow in coming months.

A Blow To The Negative Gearing Bonanza

The AFR says Bankwest has changed its affordability calculators for investor loans, such that the tax benefits are now excluded from the assessment. This reduces the amount prospective investors can get in a loan, and it also may impact some existing customers.

The post-tax affordability assessment explains why on one hand some banks have been able to lend hard on investor loans yet on the other hand, on a pre-tax basis many investors have little wriggle room if rates raise, as we highlighted recently.

Note though that not all lenders were so generous in their handling of tax benefits, and Bankwest appears now to have revised their approach to meet APRA guidelines – see specifically APG 223 within the Residential Mortgage Lending prudential practice guide.

Another market change which will further rightly tighten investor lending.

The move was confirmed by The Real Estate Conversation.

Bankwest has confirmed it will remove the tax advantages of negative gearing when determining whether or not applicants are eligible for investor loans.

The changes will mean the amount investors can borrow will be lower, and could result in the bank, a subsidiary of the Commonwealth Bank, writing fewer investment loans.

The Commonwealth Bank is expected to announce similar moves.

The Australian Financial Review reports of speculation Bankwest and the Commonwealth Bank are close to breaching the Australian Prudential Regulation Authority’s 10 per cent growth cap for investor loans.

Mark Chapman, a director of tax accountants H&R Block, told The Australian Financial Review the change would be most dramatic for existing borrowers, who will have to deal with altered rules.

“The impact of Bankwest’s decision on new borrowers is not too bad – they can just borrow through another bank,” he said. But for existing BankWest borrowers, the change is retrospective he said.

“They borrowed in good faith from this bank under one set of rules, now they are having another set of rules imposed on them.”

Australian Broker said:

“For customers who operate their investment property at a loss, where the income of the investment property does not exceed the costs, the related tax benefit will no longer be included in Bankwest’s calculation for serviceability of the loan,” the spokesperson said.

The changes will impact all new applications involving an investment lending facility as well as any existing deals which may require a new serviceability calculation.

 

Home Lending Roared Away In December

The ABS data on home finance for December 2016 confirms what we already knew, lending momentum was strong. But now we see that the number of OO first time buyers were down, whilst investment lending was strongly up.

Overall lending flows were up 0.8% in trend terms to $33.2 billion, with owner occupied loans up 0.23% ($20 billion) and investment loans up 1.68% ($13.2 billion). As a result, investment loans were 39.79% of all loans written in the month! Much of this went to the NSW market, where demand is hot, and prices are up.

Within the owner occupied data, refinancing of existing loans fell, down 1.23% to $6.38 billion, whilst other OO lending grew 0.93% to $13.6 billion. The largest percentage swing was borrowing for new dwellings, up 1.49%.

Given rates are now on the rise, we expect refinance volumes to continue to slide.

Looking at the original first time buyer data, there was 7% fall in the number of first time buyer OO loans written, down to 7,690; whilst investment loans by first time purchasers (not captured by the ABS as a separate category) is estimated to be up 1.4% to 4,236 based on the DFA household survey data. Many purchasers are going straight to the investment sector.  The average loan was $319,000 for FTB and $384,000 for other borrowers.

Finally, the original stock data shows overall loan growth on ADI’s books rose 0.67 (which if repeated for a year would equate to 8%!), way above inflation, so no wonder household debt is still building. The investment loan book grew 0.63% or $3.4 billion, whilst the OO book grew 0.7% or $7.0 billion. The total ADI book was worth 1.56 trillion and investment loans made up 34.91% of the book in December.

Property investors could force RBA’s hand

From InvestorDaily.

A resurgence in residential property investor lending could see the Reserve Bank lift the cash rate earlier than expected, according to a market analyst.

The latest ABS figures show that the value of investor housing finance increased by 4.9 per cent over November.

Investor lending is now up 21 per cent year-on-year, which is the fastest growth rate since the first half of 2015, which saw the implementation of APRA’s macroprudential regulations.

“I have a feeling that this is probably a bit of a wake-up call for the RBA,” Digital Finance Analytics (DFA) principal Martin North said.

“I think they will lift rates sooner rather than later because I think it has gotten out of hand. All indicators suggest that rates will rise.”

Mr North added that there are considerable proportions of households that are exposed to even small rate rises.

“Some of these are the more affluent households. They have such large mortgages and flat income growth,” he said. “The market could be up for a bit of a transformation in 2017.”

HSBC Australia chief economist Paul Bloxham believes most of the revival in investor activity is being driven in Sydney and Melbourne, where house prices posted strong gains in 2016.

“It has a number of implications, the first of which is, this is likely to make the RBA somewhat uncomfortable. This firms up our already held view that the RBA is unlikely to cut interest rates any further,” said Mr Bloxham.

“Our central case is that the RBA is on hold through 2017 and that they start to lift interest rates in 2018.”

Home Lending On The Rise

The latest housing finance data from the ABS underscores the renewed momentum in home mortgage lending, especially in the investment sector, and there was also a rise in first time buyers accessing the market.

  • The trend estimate for the total value of dwelling finance commitments excluding alterations and additions rose 0.6%. Investment housing commitments rose 1.7%, while owner occupied housing commitments was flat.  In seasonally adjusted terms, the total value of dwelling finance commitments excluding alterations and additions rose 2.2%.
  • In trend terms, the number of commitments for owner occupied housing finance fell 0.1% in November 2016 whilst the number of commitments for the purchase of new dwellings rose 0.7%, the number of commitments for the construction of dwellings rose 0.2%, and the number of commitments for the purchase of established dwellings fell 0.2%.
  • In original terms, the number of first home buyer commitments rose by 13.4% to 8,281 in November from 7,302 in October; the number of non-first home buyer commitments also rose. The number of first home buyers as a percentage of total owner occupier commitments rose from 13.7% to 13.8%.

Total commitments in trend terms was $32.7 billion, of which $19.8 billion was owner occupied loans, and $12.9 billion for investment purposes. 39.5% of new lending was for investment purposes, and we see the proportion of investment loans continuing to rise, it is already too high.

Looking at the month on month movements, the seasonally adjusted changes highlight the rise in the investment funding for new construction, with a 40% rise on last month. Owner occupied refinancing fell.

The more reliable trend analysis shows the monthly movements, with a strong surge in investment loans by individuals, and a stronger fall in owner occupied refinancing.

Looking at total loan stock (in  original terms) around 35% of all loans outstanding are for investment purposes, and the slide we saw late 2015 appears to be easing.

Turning to the first time buyer, original data, the number of first time owner occupied buyers rose compared with last month, and the overall mix also increased.

Combining the first time buyer property investor data from our surveys, we see a spike in overall first time buyer activity.

Last month, around 1,100 more first time buyers entered the owner occupied market than the prior month (12%), and around 150 more in the investment sector.  We also saw a rise in the fixed rate loans, as borrowers try to lock in lower rates ahead of expected rises.

So overall, still strong momentum in the housing sector, and powered largely by an overheated investment sector.